Monday, September 06, 2021

Is disgorgement the new normal in Lanham Act cases?

Grasshopper House, LLC v. Clean & Sober Media, LLC, 2021 WL 3702243, No. 19-56008, No. 19-56072, --- Fed.Appx. ---- (9th Cir. Aug. 20, 2021)

The TMA’s injunctive relief changes are probably going to make it even more clear that courts aren’t entirely sure whether damage is part of the cause of action for false advertising; since it isn’t for trademark infringement, trademark plaintiffs never have to show damage at all to get relief and even disgorgement, which has now become much more readily available. Is that true for false advertising plaintiffs?

Here, the parties compete in the market for addiction treatment. A jury found defendants liable for false advertising through a purportedly unbiased, independent site. The district court entered a permanent injunction against defendants but denied disgorgement of profits, attorneys’ fees and costs. The panel, over two separate dissents, sends it back for reassessment of disgorgement, attorneys’ fees and costs (and still doesn’t publish the opinion).

The district court excluded the plaintiff’s damages expert, finding that he didn’t apply a reliable methodology in assessing causation of damages because he discounted competing causal factors without an adequate basis and lacked the necessary expertise to make those judgments. The district court acted within its discretion in doing so, and properly cancelled the damages phase of the jury trial because no other witness had been disclosed on damages. Plaintiff argued that it should have been able to use the testimony of its principal, but even during deposition, plaintiff’s counsel stated that he “was not [there] to talk about causation and damages” and objected to questions directed to him about damages, declaring that this topic would be exclusively “within the scope of expert opinion.” He himself acknowledged at his deposition that it was “beyond his scope of understanding” to explain how plaintiff was damaged.

Disgorgement had to be sent back because the law on willfulness being required for disgorgement changed after the court ruled. But watch this language: “On remand, the district court should consider Defendants’ mental state — whatever that may be — when determining what award of profits is appropriate.” So plaintiff is apparently entitled to disgorgement without ever having shown that it was damaged by the false advertising. So, is damage to the plaintiff part of the cause of action or no?

The court said further: “it was an abuse of discretion for the district court to deny Plaintiff’s request for disgorgement on the ground that Plaintiff had not established causally, and to a reasonable certainty, the ‘financial benefit’ that Defendants received from their false advertisement as to Plaintiff.” The trial court was certain that the defendants had profited to some degree from false statements about the neutrality of the review and from a review that represented that it was “based on surveys of former [Plaintiff] clients.” Both parties’ experts calculated that each of the 192,434 visits to the relevant webpage had some value, though they disagreed about whether it was $40 or $1.80 per click. Even the lower bound would yield a disgorgement amount at least five times that of the ‘hypothetical’ alternative amount of $60,000 reached by the district court.” Because even defendants’ expert recognized some benefit to defendants, it was an abuse of discretion to find that the financial benefit to them could not be established to a reasonable certainty.

One of the dissents argued that, because the plaintiff’s theory of falsity was focused on the falsity of the process by which the review was repaired, the disgorgement theory needed to account for the possibility that the plaintiff’s facility deserved its review. That overstates a plaintiff’s burden. “Having presented sufficient evidence to show that the highly negative review was not generated by the process that was represented, Plaintiff amply established that the review was unreliable and therefore false and misleading. At the very least, Plaintiff demonstrated that the review falsely augmented its own trustworthiness and persuasiveness.”

The court vacated the attorneys’ fees award in case its ruling on disgorgement on remand affected its ruling on the award of attorney fees. And it reversed the denial of costs because successful plaintiffs are entitled to them; it wasn’t enough to say that the litigation was “excessively-protracted” or that they weren’t entitled to attorneys’ fees, which are judged by a different standard.

One partial dissent thought the district court prejudicially erred in cancelling the damages phase of the trial for civil procedure reasons.

The other partial dissent was on disgorgement. In its view, the jury only found falsity as to the procedure followed by the review and the statement of the process by which it was developed, not by any particular statement in the review itself or its ultimate star rating. Thus, damages would have to relate “to relate to people who were dissuaded from seeking treatment at [plaintiff’s facility] because of the failure to base the review on former clients’ assessments of the services, as set forth in the Process Statement.” 

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